When you’re working for yourself, understanding how tax works can feel like a job in itself. One term you might have come across is withholding tax. In this guide, we’ll explain what it means, who pays it, and how it works, so you know exactly where you stand.
In this article:
- What is withholding tax?
- Who has to pay withholding tax?
- How it withholding tax calculated?
- Withholding tax calculator
- Types of withholding tax
- How Solo can help
What is withholding tax?
Withholding tax is income tax that gets taken out of your pay before you even receive it. Instead of you setting money aside and paying it later, the business paying you deducts tax at the source and sends it straight to Inland Revenue (IRD).
Think of it as tax paid in advance. It’s similar to PAYE (Pay As You Earn) for employees, but it applies to certain types of income received by contractors and businesses.
Who has to pay withholding tax?
Not every contractor or self-employed person has to deal with withholding tax. It usually applies if you:
- Do contract work where you’re paid schedular payments (common in industries like construction, entertainment, labour hire, or certain professional services).
- Receive investment income such as interest or dividends.
- Get royalties, certain trust distributions, or payments to non-residents.
If you’re hired under a contract where schedular payments apply, your client will withhold tax from your pay and send it to IRD on your behalf. The percentage withheld depends on your tax rate.
How is withholding tax calculated?
The amount of tax withheld depends on:
- Your IRD number: If you don’t give the payer your IRD number, they’ll deduct tax at a much higher “no-declaration” rate (usually 45%).
- Your elected tax rate: For schedular payments, you’ll need to complete the IR330C Tax Rate Notification for Contractors and choose a rate from IRD’s prescribed list (often between 10% and 48%). Most contractors pick a rate that matches their expected annual income. You can use the IRD’s tax rate estimator tool to help work out your rate.
- Type of income: Different types of withholding income (e.g., dividends vs. schedular payments) have different standard rates.
| Activity number | Activity description | Standard tax rate – % |
|---|---|---|
| 1 | ACC personal service rehabilitation payments | 10.5 |
| 2 | Agricultural contracts for maintenance, development, or other work on farming or agricultural land (not to be used where CAE code applies) | 15 |
| 3 | Agricultural, horticultural or viticultural contracts in connection with fruit crops, orchards, vegetables or vineyards | 15 |
| 4 | Apprentice jockeys or drivers | 15 |
| 5 | Cleaning office, business, institution, or other premises (except residential) or cleaning or laundering plant, vehicle, furniture etc | 20 |
| 6 | Commissions to insurance agents and sub-agents and salespeople | 20 |
| 7 | Company directors’ (fees) | 33 |
| 8 | Contracts wholly or substantially for labour only in the building industry | 20 |
| 9 | Demonstrating goods or appliances | 25 |
| 10 | Entertainers (New Zealand resident only) such as lecturers, presenters, participants in sporting events, and radio, television, stage and film performers | 20 |
| 11 | Examiners (fees payable) | 33 |
| 12 | Fishing boat work for profit-share (supply of labour only) | 20 |
| 13 | Forestry or bush work of all kinds, or flax planting or cutting | 15 |
| 14 | Freelance contributions to newspapers, journals (eg, articles, photographs, cartoons) or for radio, television or stage productions | 25 |
| 15 | Gardening, grass or hedge cutting, or weed or vermin destruction (for an office, business or institution) | 20 |
| 16 | Honoraria | 33 |
| 17 | Modelling | 20 |
| 18 | Non-resident entertainers and professional sportspeople visiting New Zealand | 20 |
| 19 | Payment by a labour hire business to any person performing work or services directly for a client of the labour hire business | 20 |
| 20 | Payments for: – caretaking or acting as a guard – mail contracting – milk delivery – refuse removal, street or road cleaning – transport of school children | 15 |
| 21 | Proceeds from sales of: – eels (not retail sales) – greenstone (not retail sales) – sphagnum moss (not retail sales) – whitebait (not retail sales) – wild deer, pigs or goats or parts of these animals | 25 |
| 22 | Public office holders (fees) | 33 |
| 23 | Shearing or droving (not to be used where CAE code applies) | 15 |
| 24 | Television, video or film: on-set and off-set production processes (New Zealand residents only) | 20 |
| 25 | Voluntary schedular payments | 20 |
| 26 | Non-resident contractor (and not a company) | 15 |
| 27 | Non-resident contractor (and a company) | 15 |
At the end of the year, you still file a tax return. The tax already withheld is credited against what you owe. If too much has been deducted, you’ll get a refund. If not enough, you’ll have to top it up.
Withholding tax calculator
To calculate your tax-home pay and withholding tax on schedular payments, enter your the amount you invoice your client (excluding GST) and your withholding tax rate. If you’re not GST registered, you can ignore the GST and total amounts.
Types of withholding tax
There are several types of withholding tax in New Zealand. Here’s a deeper dive into the main ones.
1. Schedular payments
- What it is: A system for contractors where the payer (your client) deducts tax directly from your income.
- Who it applies to: Contractors in industries like construction, agriculture, fishing, entertainment, and certain professional services.
- Rates: You choose your rate when you start a contract by filling in an IR330C form. If you don’t choose, a default rate applies.
- Why it matters: You can’t ignore tax during the year, it’s already being withheld. But you still need to file a tax return to square things up.
Example:
You invoice a client for $1,000.
- Your chosen schedular rate is 20%.
- Your client pays you $800, and withholds $200, sending it to IRD.
- At the end of the year, that $200 counts toward your total income tax bill.
2. Resident withholding tax (RWT)
- What it is: Tax taken from interest and dividends you earn in New Zealand.
- Who it applies to: Anyone with NZ bank accounts or NZ investments.
- Rates: Commonly 10.5%, 17.5%, 28%, 30% or 33%. You choose the rate with your bank or investment provider.
- Why it matters: Helps cover tax on investment income automatically, but you need to check the right rate is applied.
Example:
You earn $100 interest from your bank.
- You’ve elected an RWT rate of 17.5%.
- The bank withholds $17.50 and pays you $82.50.
- At tax time, the $17.50 is credited against your total tax.
3. Non-resident withholding tax (NRWT)
- What it is: Tax on NZ-sourced income paid to people or businesses overseas.
- Who it applies to: Non-residents earning NZ dividends, interest, or royalties.
- Rates: Standard rates are 15% for dividends, 10% for interest, and 15% for royalties, but these may be reduced by tax treaties.
- Why it matters: Ensures offshore earners contribute tax to NZ before money leaves the country.
Example:
A company in Australia earns $1,000 in royalties from a NZ business.
- NRWT rate on royalties is 15%.
- The NZ business withholds $150 and sends $850 to the Australian company.
4. Other special cases
This category includes special cases:
- Māori authority distributions – often taxed at 17.5%.
- Trust distributions – may be subject to withholding if the beneficiary hasn’t supplied an IRD number.
- Specified foreign investors – may have special rules.
Example:
A Māori authority distributes $500 to a member.
- Withholding rate is 17.5%.
- The member receives $412.50, and $87.50 is sent to IRD.
How Solo can help
With Solo, your pre-taxed income — including withholding tax credits — syncs automatically from the IRD and is tracked in one place. That means you’ll always know how much tax has already been covered and whether you’re on track.
Solo also makes it easy to file GST and income tax returns, claim expenses, and create professional invoices. Try it free today.
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